David Tepper, the contrarian investor, is one of the most successful hedge fund managers on the street. His company Appaloosa Management was able to beat the market with a large margin almost every single year in the last decade. He earned a reputation by snapping up banking stocks when their shares were trading at the very bottom. This bold move returned a whopping 130% in 2009. His return in 2010 was also above 20%.
As of Q2 2011, Appaloosa had a diversified portfolio of equities. Tepper was selling the financial stocks for a while, but they still constitute 20.38% of his holdings. Financials are followed by technology (17.8%) and energy (15.3%) companies. According to Edgar Online, he made significant transactions in the last quarter. I have analyzed his recent transactions in a previous article, titled "4 Big Sells and 3 Big Buys by David Tepper".
While doing this analysis, I noticed 7 high-dividend stocks in his portfolio. I have examined these dividend stocks from a fundamental perspective, adding my O-Metrix Grading System where applicable.
Company | Ticker | % of Portfolio | Yield | Payout Ratio | O-Metrix Score |
Pfizer | 7.64% | 4.53% | 74.79% | 3.2 | |
International Paper | 3.65% | 4.44% | 24.88% | 5.98 | |
Microsoft | 2.9% | 2.66% | 23.33 % | 7.92 | |
Applied Materials | 2.14% | 2.96% | 24.23% | 7.60 | |
Merck & Co. | 1.95% | 4.86% | 109.21% | 3.14 | |
KLA-Tencor | 1.35% | 4.46% | 21.07% | 11.58 | |
Medtronic | 1.34% | 3.1% | 31.20% | 5.68 |
Pfizer is the top stock in David Tepper’s portfolio. He invested 7.64% of his portfolio in Pfizer. The stock was doing great until June. Between December and June, the stock went up from $16 to $21, returning more than 20%. However, since then it has collapsed to $16.5 before bouncing back to $17.67. The P/E ratio is 16.51, whereas the forward P/E ratio stands at 7.75. Analysts estimate annualized EPS growth of 3.27% for the next 5 years. The company has a nifty yield of 4.53% but its O-Metrix score of 3.2 is one of the lowest in the list.
Both Jim Cramer (click here for my article regarding Jim Cramer and IP) and David Tepper are bullish on International Paper. Their bullishness is well justified. The company has a low P/E ratio of 8.33 and a lower forward P/E ratio of 7.4. It is a highly profitable company with a gross margin of 27.59%. Analysts estimate 4.97% EPS growth for the next 5 years which is pretty reasonable. With a nifty yield of 4.44%, International Paper has an O-Metrix score of 5.98, which is well above the market average.
Microsoft is another top dividend stock in David Tepper’s portfolio. He invested 2.9% of his portfolio in Microsoft. The stock is in a trading range between $23.5 and $$28 since last year. The closing price of $24 is at the lower end of this range. Thus, I see a great bouncing potential in Microsoft up to $28 in the short-term. My long-term fair-value estimate range is between $40 and $46.
From a fundamental perspective, the stock has almost 100% upside potential. It is trading with a low P/E ratio of 8.91 and a forward P/E ratio of 7.63. Analysts estimate 10.43% EPS growth for the next 5 years, which is very reasonable given the 17.63% EPS growth of the past 5 years. With a yield of 2.66%, Microsoft has an O-Metrix score of 7.92.
Applied Materials is another tech stock that is not much appreciated by the street, although it offers good value. The company has a yield of 2.96%. It is trading with a low P/E ratio of 9.09 and a lower forward P/E ratio of 8.2. PEG value of 0.89 is below the norm. The company has a debt/equity ratio of 0.03 and a long-term debt/equity ratio of 0.02. Thus, there is no debt issue. AMAT is highly profitable with a gross margin of 40% and a net profit margin of 14.48%. Analysts estimate 10.18% EPS growth for the next 5 years. It has an O-Metrix score of 7.6.
Similar to Pfizer, Merck has a poor O-Metrix score of 3.14. I think David Tepper is keeping these stocks for diversification purposes. Both Pfizer and Merck have low Beta values of 0.72. The company is trading with a high P/E ratio of 22.65, but its forward P/E ratio is 8.12. The yield of 4.86% is one of the best in the industry. However, the payout ratio of 109% is a warning signal. The stock lost 13.6% in the last month. The expectations for next year's earnings are too high. I would wait until the earnings statement confirms the expectations.
KLA-Tencor is a semiconductor equipment producer located in California. It has a low P/E ratio of 7.23, and a lower forward P/E ratio of 7.87. The company offers a nifty yield of 4.16%. The current ratio is 4.17, implying plenty of current assets in the balance sheet. The gross margin of 60.34% and net profit margin of 25% is among the best in the industry. Analysts estimate 13.33% EPS growth for the next 5 years, which is conservative given the 20% EPS growth in the past 5 years. It is one of the few A+ stocks with an O-Metrix score of 11.58.
Medtronic is a medical equipment manufacturer headquartered in Minneapolis, Minnesota. Since its peak of $43 in mid-May, the stock collapsed to $32, losing 25% in a quarter. However, I think the bearishness is unjustified. The stock is trading with a low P/E ratio of 10.94, and a lower forward P/E ratio of 8.28. It has a yield of 3.1%. Analysts estimate 7.81% EPS growth for the next 5 years. Analysts' mean target price is $42, implying 31% upside potential in medium-term. With an O-Metrix score of 5.67, I think Medtronic is a safe dividend stock to invest in.
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